But there’s a silver lining: It may drive investment into other sectors, the World Bank says.

“Over the past decade, high commodity prices tilted investment incentives in favor of the resource sector and the non-tradable sectors (e.g., the real estate sector) against manufacturing and other tradable sectors,” the World Bank said in its latest Indonesia Economic Quarterly, released Tuesday.

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The bank said manufacturing’s share of total investment into Indonesia dropped to 12% between 2002-11, against nearly 20% in the period from 1990-96.

“Going forward, lower commodity prices should increase the relative profitability and attractiveness of manufacturing and help Indonesia develop its industrial base,” the World Bank argued.

Declining commodity prices over the past two years have led to a deterioration in Indonesia’s current account, which contributed to the massive exit from Indonesian assets during last summer’s taper-related crisis. But by knocking down the rupiah’s real exchange rate, that’s helping manufacturing exports and competitiveness.

“With reforms to reduce the constraints faced by manufacturing firms, weaker commodity prices may therefore be a blessing in disguise,” the report said.

Rapidly rising wages in China present Indonesia with a potential opening to regain a comparative advantage in labor-intensive export sectors. Nominal wages in China have risen by almost 15% a year since 2001, which — together with slowing productivity growth in low-skilled sectors — has led to a sharp rise in Chinese unit labor costs grow since 2005, the World Bank said.

Appreciation in the Chinese yuan – which has seen its real effective exchange rate rise 30% since 2005 — is further eroding China’s competitiveness in manufactured goods.

These pressures, combined with slower overall economic growth, are prompting firms to look beyond Chinese coastal areas as a manufacturing base. Some of that investment is now flowing to Southeast Asia.

“These dynamics offer ASEAN countries, including Indonesia, an opportunity to attract more investment in their manufacturing industries,” the World Bank said.

Indonesia has been attracting investment in recent years in the automotive and consumer-goods sectors, both for export and to meet growing demand domestically.

But maximizing its present opportunity will require reforms, the bank said, highlighting the need to improve labor productivity, infrastructure and the legal system.

“In light of ongoing economic risks and Indonesia’s ambitious development agenda, laying the groundwork for future reforms, minimizing policy uncertainty and making continued reform progress in some areas should remain a priority,” the report said.

The bank expects Indonesia’s economy to grow by 5.3% this year — down from 5.8% in 2013, its slowest pace in four years. The government recently cut its growth forecast for the year to 5.5%-5.9%, from 5.8%-6.2% previously.

About Southeast Asia Real Time

Indonesia Real Time provides analysis and insight into the region, which includes Singapore, Thailand, Indonesia, Vietnam, Malaysia, the Philippines, Myanmar, Cambodia, Laos and Brunei. Contact the editors at SEAsia@wsj.com.

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